Besides calculating the assets of a company, its profitability, and financial performance, it is also important for company owners to know how to calculate the net worth of a company. Often, potential investors look up various metrics and measures of a company when valuing a company and considering investing in it.
Though, what is most important in valuing a company is finding out its net worth. This shows what the worth and the value of the company are in the market. It also helps investors of a company find out potential opportunities so that they can expand their company or business.
Knowing how to calculate the net worth of a company is easy. It is pretty much the same as calculating the net worth of any other thing or a person. In this article, I will discuss how to calculate the net worth of a company and other related topics. With no further ado, let’s dive straight into the article.
How to Calculate the Net Worth of a Company
The net worth of a company is also known as the company’s book value. Knowing how to calculate the net worth of a company is fairly easy. The net worth of a company is equal to the value of all the assets minus the value of all the liabilities of the company. The assets can be in the form of cash or equipment. Meanwhile, the liabilities can be anything that the company owes, from a business loan to an employee’s salary.
Firstly, add all the assets that the company owns. For example, a company owns $700,000 in cash, $800,000 in equipment, and $40,000 in land. This means that the total amount of the assets is equal to $1.54 million.
Secondly, add all the liabilities that the company is obligated to repay. For example, a company has an equipment loan of $400,000, an account payable of $200,000, and a commercial mortgage on a warehouse for $500,000. This means that the total amount of the liabilities is equal to $1.1 million.
Lastly, subtract the total value of the liabilities from the total value of the assets to calculate the net worth of a company. To use the same example, the company has assets worth $1.54 million and liabilities worth $1.1 million. Subtracting $1.1 million from $1.54 million is equal to $440,000. This means that the net worth of the company in the example is $440,000.
Estimating The Net Worth of a Private Company
While it may be relatively easier to calculate the net worth of a public company because you can get the records of the company, it certainly is not the case with private companies. Figuring out the net worth of a private company is very difficult unless you have access to the private company’s financial statements.
Private companies do not feel the need to publicize their financial statements. Hence, they keep this information fully confidential. This makes it extremely difficult to even compare such private companies with other companies.
The only way the net worth of a private company can be estimated is by using the balance sheet data of other companies in the same industry that have publicized their financial statements. To find such balance sheet data, industry publications can be read, for example, The Risk Management Association’s Annual Statement Studies. A person could also check their local library for a copy of such a subscription-based publication. It may also be possible to find such publications online.
Increase In Net Worth of a Company
An increase in the net worth of a company indicates that the company has been doing well in terms of profits and making assets. Further implications that could be made about an increase in the net worth of a company are that the net profit of the company is increasing, the net revenue of the company is increasing, the net assets have increased over time, and the liabilities have been decreased over time.
Decrease in Net Worth of a Company
A decrease in the net worth of a company means that the company’s overall performance has been declining and the net income from the company is decreasing. Further implications that could be made about a decrease in the net worth of a company are that the net profit of the company is decreasing, the net revenue is decreasing, the net assets have decreased over time, and the net liabilities have increased over time.
Calculating the net worth of a company is considered only the first step in valuing a company. Many analysts also compare the net worth of a company with the market value, which is found by multiplying the company’s stock price by the number of shares. This helps potential investors and other business officials better analyze a company regarding its net worth.
I hope this article helped you in calculating the net worth of a company, and I am sure that it must have. If you have any queries regarding anything related to net worth, feel free to contact us or leave a comment below. I will be sure to get back to you. Lastly, I would also love to hear from you about your experiences with companies and find out their net worth statements.